Labor costs (salary and benefit costs) for federal civilian employees often constitute a substantial portion of an agency's budget, typically exceeding 50 percent of its total budget. Even for those agencies that have considerable amounts of contract or grant funding, labor costs are an important part of the budget. Once an agency hires someone, there is a continuing requirement to pay that person until they leave.

It might seem as though budgeting labor costs would be relatively easy, compared with forecasting contract or grant needs. However, many different aspects of federal salaries and benefits can make budgeting accurate labor costs complicated, especially when an agency has thousands of civilian employees. Here are some factors that agencies should consider when budgeting labor costs.

Salary Costs (Object Class 11)

Federal fiscal years can have three different lengths in hours, depending when they begin and end: 2080 hours, 2088 hours, or 2096 hours (typically in leap years). The U.S. Office of Management and Budget (OMB) Circular A-Il lists the number of hours for each fiscal year.

This difference can become an important variable in an agency's budget. For instance, 2096 hours is a 0.77 percent increase over 2080 hours. For a person with a salary of around $100,000, the difference equates to approximately $770 in salary, with probably another $200 in benefits. For an agency with 1,000 people and an average salary cost of $100,000, this equals nearly $1,000,000 needed to pay for those additional 16 hours.

Federal salaries are paid by the hour. So if you know the grade and step of an employee, how do you calculate the hourly rate from the salary tables? Do you divide by 2080, 2088, or 2096 hours? None of the above! You use 2087, which is the average of the three possibilities, weighted by the number of years in each category. The salary tables at the U.S. Office of Personnel Management (OPM) website give the typical annual and hourly amounts.

Federal employees are generally paid every two weeks, so there are 26 pay periods (or 26.1 or 26.2) in a year. Fiscal years rarely start on the first day of a pay period, so the first and last pay period of a year are usually less than 10 paid days. Pay period numbers are based on the calendar year, so "pay period 1" starts with the first pay period in January. This means that the first and last pay period of the fiscal year (starting October 1) is usually around pay period 19.

Not every federal agency uses the same start date for pay period 1, however. While not critical to the budget needs, you do need to know how to track labor costs by pay period, as well as when paid payrolls will post to your agency's financial system.

One last point on pay periods: Because most fiscal years are more than exactly 26 pay periods (2080 hours), occasionally there is a need for a pay period 27 to put things back in balance. This does not affect the budget, but it can affect an employee's taxable income. It is possible for an employee to receive 27 paychecks in one taxable year, giving them an annual taxable income about 4 percent higher than what the pay table shows.

If you know a person is a GS-12, step 5, can you determine her salary? Well, you might need to know where she is physically working. The federal government has 31 unique locality pay areas, plus the "rest of the United States," Alaska, and Hawaii, not to mention overseas posts of duty. A GS-12, step 5, is paid a different rate in just about every location. Additionally, there are agencies that use pay bands or other schedules different from the standard GS-I through GS15, with 10 steps per grade.

Once you figure out what the current pay rate is, you must determine how long before it changes. Most rates will change at the beginning of pay period 1, when the federal pay raise takes effect. But with locality pay, it will not be the same percentage for everyone.

What about a step increase? The average wait-time for a step increase is approximately 1.5 years. Those in the first three steps get an increase every 52 weeks, and those in the next three steps get an increase every 104 weeks. (Those in the last three steps get an increase every 156 weeks.) However, most employees are in the first six steps. A person could also get a promotion (permanent or temporary), a quality step-increase award, or the termination of a temporary promotion.

Full-Time Equivalents (FTEs)

According to OMB (Circular A-11, Section 85), "FTE employment means the total number of regular straight-time hours (not including overtime or holiday hours) worked by employees divided by the number of compensable hours applicable to each fiscal year. Annual leave, sick leave, compensatory time off, and other approved leave categories are considered 'hours worked' for purposes of defining FTE employment." Therefore, when the fiscal year is 2080 hours, a person working (or paid for) 2080 hours is one FTE. When the fiscal year is 2096 hours, a person working 2096 hours is still one FTE, but the cost of that FTE is different. Note that overtime and holiday hours do not affect FTE calculations.

While most people are compensated for 2080, 2088, or 2096 hours, some people are scheduled to work less than full-time, and they do not constitute one FTE. They may work only 24 or 32 hours per week, or they may work 40 hours per week, but only up to a total of 1040 hours. To further complicate matters, these people often have special benefit rules.

Official FTE use is reported on the 113G report. This report always uses exactly 2080 hours (26 pay periods). It can do this because it does not generally start counting on the first day of the fiscal year, nor does it end on the last day of the fiscal year.

Many people use hours from their payroll system to calculate FTEs, which typically gives a more accurate count, especially near the beginning of the fiscal year. Either method should give you roughly the same count for the entire year.

Other Salary Costs (Object Class 11)

There are a number of other issues that affect the budget for salary costs. For some agencies, overtime is a big issue. The overtime rate of pay is 150 percent of regular time up to GS-9, step 4. After that, it varies until about GS- 12, step 6, where it becomes the same as the regular rate. OPM publishes the overtime rates in the salary tables.

The best way to deal with overtime is to look at two year's worth of data by pay period to see if you can discern any pattern that would help you budget. In theory, overtime is discretionary, so agencies could manage to the amount that they budget. Holiday pay is what people get when they work on a federal holiday. Once again, look at the data and see if there is a pattern. Working and taking compensatory time has no impact on budgeting for labor costs.

Cash awards can be thought of as discretionary, even though some agencies have negotiated levels with their unions. Some agencies budget for cash awards as a percent of salaries - for example, 1 percent. Some agencies also use time- off awards, but those do not have a financial cost.

Federal employees earn annual leave at a defined rate based on their seniority. Typically, they can carry over a balance of up to 240 hours at the end of the leave year (end of pay period 26). Senior executives and people with overseas tours could have higher balance limits. If federal employees resign or retire, they are paid their annual leave balance in a lump sum.

Even people with a limit of 240 hours could accumulate more than 400 hours with a well-timed retirement. This could easily cost the agency $25,000 and significantly more for senior executives and others with high balance limits. Review the historical data on lump sum annual leave payments for your agency, and recognize that most people retire at the end of December, leaving you much of the year to adjust if you have unexpectedly large lump sum payouts.

Some agencies have people who use leave without pay (LWOP) regularly, often because they lack available annual or sick leave. In times of financial difficulty, some agencies encourage staff to take LWOP to reduce labor costs. If a person takes two hours of LWOP in a pay period, it means that they will only be paid for 38 hours of work. This does not change their salary, but it does change the labor cost for that person for that pay period. Check the LWOP statistics for your agency to determine if this could be a consideration for you.

Benefit Costs (Object Class 12)

Benefit costs cover a wide range of items: primarily healthcare, retirement, thrift savings plan (TSP), social security, Medicare, and life insurance. Some are relatively easy to calculate (social security, Medicare, and retirement), but others vary by individual. Healthcare can range from none (maybe they depend on a spouse) or varied based on hundreds of plan choices and costs. TSP deductions and matches are determined by the participants, as is life insurance.

Some benefits change when salary changes (retirement, TSP, and social security), but others do not (healthcare). OPM annually announces the average healthcare increase that takes effect in January, but the specific increase depends on the choices of each individual, and many also take advantage of open season to change health plans. Check the amount your agency pays each pay period by comparing the pay periods before and after the annual increase takes effect.

Employees that do not have a full-time, permanent appointment may not qualify for the same benefits. The only good way to calculate benefits is to determine what is actually being paid and use that as a fixed amount or a percent of salary.

There are many other costs that are budgeted as personnel benefits (Object Class 12):

* recruitment bonuses

* relocation bonuses

* retention allowances

* permanent change of station relocation costs

* cost of living allowances (not to be confused with pay raises)

* student loan repayment

* allowances for uniforms

* public transit subsidies.

Review agency historical cost data to determine if there are significant costs in these activities and the appropriate amounts to budget.

Benefits for Former Employees (Object Class 13)

Object Class 13 is considered to be part of the overall category "personnel compensation and benefits." Some agencies budget for unemployment compensation, workers' compensation, and severance payments (voluntary or involuntary). There are typically historical or special circumstances that require agencies to budget for these costs, and those circumstances will dictate how much you should budget for these costs.

Armed with this information, you should now be able to better budget and manage federal labor costs.

Author affiliation:

Thad Juszczak is a director with Grant Thornton LLP. He is a retir ed federal budget official and now consults on budgeting and performance management issues with such organizations as the U.S. Department of Homeland Security, U.S. Department Agriculture, NASA, and Yale University. Contact him at Thad.Juszczak@gt.com.